The second oldest profession… Barter and trade

After finishing a course in 1031 tax-free exchanges in the early 1970s, the first agreement drawn up on this “revolutionary” means of doing business was a “NON-qualified 1031 tax-free exchange” using “pure boot”. This was not “like property”. A builder had been building houses like crazy and suddenly the market turned south and no one came up to buy the finished houses. Buyers who had just paid top dollar for these new homes and have since moved in would not have appreciated the builder selling the rest of the inventory at a deep discount and thereby eroding the value of the entire subdivision on a of comparable sales price. The builder had been through many construction cycles and did not want to abandon the project leaving previous buyers in the lurch. Rather, he found new buyers, who had previously been turned down due to lack of funds to close, and offered to hold second mortgages at 10% to 20% LTV (Loan To Value). The terms were low and the interest rate was affordable on second mortgages. With a long history with local savings and loan banks, new first mortgages were processed and underwritten using proven hand underwriting; the only way to do business at that time. Those prospective buyers with a good employment history, reasonable credit, and the ability to pay were able to move into their new homes with little out-of-pocket money, since the builder paid most or all of the closing costs.

This particular builder, in addition to building single-family homes, had built 10-16 unit apartment buildings on a parallel stretch for investor groups and himself, and was executing with the primary goal of long-term wealth accumulation and tax shelter . Being located in a state capital and a major university, new construction rentals were in high demand. Openings were few and in some cases, depending on the locations, there were long waiting lists. Rents were accelerating in light of this high demand for rental housing. The developer offered all tenants in their system the opportunity to own their own home, in many cases, for a slightly higher monthly housing expense than they were currently paying, with the added incentive of paying little or nothing. from your pocket. The builder made it affordable. Most were held back by the up-front cash investment requirement. In less than 60 days all the houses had been sold. The 20 excess inventory homes that had been completed and vacated were sold with the interest and expense meter running. The houses were scattered in four subdivisions. The builder’s profit came in the form of monthly checks on second mortgages. He had year passes, most paid on time and genuinely appreciated the opportunity to own a home and worked very hard to maintain it.

Deja vu again, build cycle after build cycle, builders are again in many areas of the country taking inventory and not knowing what to do. Many builders are tempted to file for bankruptcy or, in some cases, keep buyers’ deposits before finishing during these down periods. It is for the builder with moxy to survive.

In this particular case, a listing had been taken for a 16 unit apartment building immediately across the street from a small metropolitan airport. All units were two-bedroom and larger than older complexes in the area. Flight paths were not over the property, but it was an excellent location between the university and the state capital and major employment centers.

There were no vacancies. A son had convinced his father, who had experience in other investments, to sign the mortgage note with him to provide financial strength to the deal.

The son was to do all the administration and handle the daily needs of the property. After being on the property for a year, the son began to have marital problems and his business was in decline. The son moved to another state leaving dad with the bag. The father was totally out of his comfort zone. The son did not invest in the deal, so he resigned and claimed his interest from his father. The wife also signed. He wanted to get out of this situation as soon as possible. The builder and his agent called.

These days, mortgages were affordable with qualification. Another savings and loan in the area had this particular mortgage. The listing had been on the market for two days. The builder did an inspection and was aware of the work of the builder who had built the 16-unit apartment building three years earlier. The first questions were asked as to whether the seller (the father was left with the bag in hand) would be interested in taking the second mortgage paper as a down payment on the deal. As it turned out, at the time, the father/salesman was a big discount paper buyer. He had a portfolio of discount land contracts on the order of a million dollars accumulated over a fifteen year period. His normal MO (modus oparandi) was to buy land with first mortgage contracts at 20% to 30% discount. With nominal interest rates of 8% to 10% at the time, the yields on him were in the 14% to 15% interest range. At the time, the state statue for usury was 11%. Keep in mind that if the payor of the note refinanced or sold the property, the returns would skyrocket to more than 20%. He loved the notes. Run to the mailbox every month, “Walla”—checks. He had a lawyer ready to write letters and foreclose if necessary, but he was able to resolve most situations with negotiations or the borrower would stop suing and hit the road. Being a careful note buyer with a good equity loan to protect his investment, there was a certain comfort zone.

Now this was a different animal. Loan-to-value was near the top, but there was a “seasoning” of the paper, meaning there was a history of paying on time by the payer of the note. The father, the one holding the bag, was very eager to get rid of the property and the daily demands of dealing with 16 separate rental clients. To do? The father agreed to take the second mortgage paper at a nominal 10% discount and negotiated a two-year personal and business guarantee on each mortgage. Only 14 second mortgage notes were needed to balance the shares in the transaction between the purchase price and the balance of the mortgage. The builder paid registration fees and closing costs on all instruments and assignments. Even the commission was taken in the form of a note. For a two-day listing and the low cost of sale involved, this wasn’t bad. Those monthly checks were well spent.

Also, if one of the notes suddenly failed, the builder reserved the right to substitute another second mortgage note if the need arose. You would then either pay off the difference in cash or substitute a monthly income stream for another note to pay off the past due amount and recover the note. The builder was found to have an excellent credit rating and protected the lots from him like a jealous lover. If a problem arose, he would step in and try to resolve the default situation, thereby saving the lender who frequently used a foreclosure on the books, and in this case, the second mortgage. He would do this by paying the payer of the note to move out and perhaps rent one of his properties and stop claiming the property while he saved the borrower/buyer’s credit rating for use another day. Life is messy at times and illness, divorce or job loss and such non-pay results. Time has proven this builder’s utilization of this winning formula for success by becoming a multi-millionaire many times over in ascending or descending building cycles. He always used paper to make a rescue when necessary, like in a build-down cycle. If he had to repossess a property, he would either rent it out until he was paperless again or sell it outright with super-term financing.

Today, builders and homeowners are once again operating in a soft market. The “paper business” is a great way to make deals work. With the advent of corporate note buyers in the market, deeply discounted opportunities may be limited; however, there are still opportunities. If you end up with paper in a deal, hopefully at a discount, many creative professionals use them at face value to put together buy and trade deals. There is more than one way to collect real estate sales. If a buyer has a car, truck, semi-trailer, boat, mobile home, motorcycle, vacant lot, gemstones (appraisals vary), diamonds, collectibles, personal property loan, business promissory note, court adjudication, pending judgment for a car accident, life insurance annuities, inheritances, business inventory, chattel mortgages on equipment, or any number of combinations can be used to make deals work.

Yes, it’s hard sometimes, but if you can stay within your comfort zone and two parties agree after using professional appraisers and such, give it a try. The alternative is to do nothing and let the market roll over you like a runaway freight train, or you can make something happen. After all, that was how Manhattan was bought, bartered, and traded. Already seen on the market today. Think outside of your comfortable universe and see an old way of doing new business. Sometimes the deals may be “like-kind” property and qualify for favorable tax treatment, other times, it will just be “starter” with no tax benefits. Other times it can be both. Already seen. Here we go again.